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Expanding its reach

* In its analyst meet, the management highlighted its strategy of: a) improving its presence within the short term market, and b) diversification into markets such as gas and coal. Its Real Time Market (RTM) continues to perform well and the company expects volumes to grow as demand rises. Concerns have been raised over the implementation of market coupling. However, the management does not expect it to come in the near future.

* While we keep a keen eye on the implementation of coupling, we agree with the above view and see market coupling as an enabling provision for discussion over future market design (see here). Our medium-term story on IEX has played out well, with the company registering strong market share gains since our coverage initiation (see here). We expect volume growth to continue as Power demand recovers. We remain positive on the long-term prospects of its RTM product. Newer product launches such as longer duration contracts (LDCs), cross-border transactions, and an uptick in gas exchange volumes can provide a boost to profitability. We Maintain Buy with a target price of INR355/share, based on 36x FY23E EPS.

* Here are some key takeaways from the analyst meet:

Banking on new product launches

* IEX launched its RTM product in Jun’20. The same has picked up well, with URS power coming on board on the sell side. RTM now accounts for ~15% of volumes. It expects RTM volumes to increase as demand recovers and more DISCOMs come on board. Currently, the buy side is slightly concentrated with the top five buyers accounting for 58% of RTM volumes.

* The management expects momentum for new products to continue with the launch of: a) LDCs, b) green DAM, and c) cross-border transactions. The SC hearing in Feb’21 that would have paved the way for the launch of LDCs (and electricity derivatives) has been postponed. In terms of cross-border transactions, the company is in talks with the National Load Dispatch Centre (NLDC). The latter is working on creating new bid areas. Cross-border transactions can help add 3-4BUs in the first year of launch. With new crossborder links being setup, this can rise to 12BUs going forward.

* Apart from the Electricity segment, the company has diversified into the Gas market with the launch of Indian Gas Exchange (IGX). It is also working on modalities related to the potential formation of a coal exchange.

Market coupling unlikely in the near future

* The recent Power market regulations have enabled the creation of a market coupling operator, leading to concerns over its implementation and impact on IEX. As per the management, this is only an enabling provision and it does not foresee market coupling coming in the near future. The launch of coupling will require a different set of regulations and a round of discussions will take place on the same. It sees coupling coming only in tandem with MBED (Market Based Economic Dispatch).

* Market coupling unlikely in the near future

* The recent Power market regulations have enabled the creation of a market coupling operator, leading to concerns over its implementation and impact on IEX. As per the management, this is only an enabling provision and it does not foresee market coupling coming in the near future. The launch of coupling will require a different set of regulations and a round of discussions will take place on the same. It sees coupling coming only in tandem with MBED (Market Based Economic Dispatch).

Leveraging its technology platform

* IEX’s focus remains on leveraging its platform by providing new offerings to its clients. It is working on a developing web and mobile access platform to provide access to trade data for stakeholders. The management plans to develop tools to enable decision making for its clients (for instance, data providing comparison between DSM and RTM).

* It is increasing automation to improve efficiency. IEX introduced automation through API-based bidding for its RTM product. About 70-75% of RTM transactions are through this API route and the management is looking to implement this in other product segments.

* In terms of scalability, the management said the current platform is scalable to handle India’s generation volume and hence no significant investments are required on that front.

Gas exchange requires enablers for growt

* The management said volumes for its gas exchange are nascent and its focus is on increasing awareness. For volumes to grow, it would require enablers such as: a) formation of an independent system operator, b) implementation of GST for natural gas, and c) rationalization of transportation tariff. While progress is being made on the above front, IEX believes it will take time for these enablers to fructify. It added that 3-4 strategic players may invest in IGX.

* IEX plans to have more hubs in place (Dabhol and WB) and newer contracts (quarterly) once volumes start picking up.

Market share gains continue; Maintain Buy

* The launch of new products has provided a fillip with TAM+RTM now contributing 20% of IEX’s volumes (v/s less than 10% in FY20). Volume momentum in the first two months of 4QFY21 has been strong at IEX, with over 45% YoY growth. RTM continues to perform well with volumes in Jan’21 crossing 1.2BU (the highest ever monthly volume for the product).

* Long-term potential for IEX remains huge, given the nascent market share for exchanges in India’s Power generation. With newer product launches, a continued oversupplied market, and IEX’s competitive positioning, we expect volume/PAT to increase at 17%/20% CAGR over FY21-23E and build in higher RTM volumes. Given the strong growth and high return profile (RoEs of ~45- 50%), we Maintain Buy and raise our multiple to 36x FY23E EPS (v/s 32x earlier) with a target price of INR355 per share.

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